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Mortgage loan loss

Mortgage Loan Loss Can't Offset Real Estate Gain on Sale of
U.K. Home

M r. and Mrs. Quijano were U.S. taxpayers who sold
their home in the United Kingdom. They purchased it in September 1986
for 297,500, financing the entire amount with a mortgage, which two
years later they increased to 330,000 and, in March 1990, to 333,180.
They made capital improvements of 45,647 to the house, and, in July
1990, they sold it for 453,374-net of selling expenses-and retired the
mortgage. On their 1990 joint federal income tax return, the Quijanos
reported a capital gain of $308,811, using the exchange rate on the
date of purchase ($1.49 to 1) to determine their cost basis but using
the exchange rate at the date of sale ($1.82 to 1) to compute the sale
price.

The couple later amended their 1990 return to claim a $30,610
refund. They arrived at the figure by using the exchange rate on the
sale date to determine both the purchase and the sale price and to
determine the cost of the capital improvements. This reduced the
capital gain to $199,491. The Internal Revenue Service disallowed the
amended refund claim, stating that the cost basis of the house had to
be determined using the exchange rate on the purchase date and when
each capital improvement was made.

I n 1991, Mr. and Mrs. Jasko's residence was destroyed
by fire. The loss was covered by fire insurance. The Jaskos incurred
$71,000 in legal fees during 1991, 1992 and 1993 in a dispute with the
insurance company over the home's replacement cost. In 1992, they paid
$25,000 of those legal fees and deducted them on their 1992 tax return
as a miscellaneous deduction. The IRS disallowed the deduction under
IRC section 212(1), which allows individuals to deduct all ordinary
and necessary expenses paid or incurred during the taxable year for
the production or collection of income. Because the Jaskos did not
hold their house for the production or collection of income, the legal
fees were not deductible. The Jaskos conceded this point but claimed
the insurance policy should be considered separate from the ownership
of the home, and therefore the legal fees incurred to regain the
house's full replacement cost should be deductible.

Result: For the IRS. The Tax Court rejected the
Jaskos' argument that the insurance policy should be separated from
the residence. Citing the "origin of claim" doctrine, the
court said the policy was meant to reimburse the Jaskos by providing
the replacement cost of a home. Without the home and the fire, the
insurance policy would be meaningless, so the home and the fire were
the origin of the Jaskos' legal claim. The Tax Court also concluded
that the destruction of the house by fire was the equivalent of
disposing of a capital asset or an involuntary conversion. Therefore,
the legal fees were a nondeductible capital expenditure. They could,
however, be used as an offset against any gain the Jaskos may have
realized from the insurance proceeds.

The results of the 2016 presidential election are likely to have a big impact on federal tax policy in the coming years. Eddie Adkins, CPA, a partner in the Washington National Tax Office at Grant Thornton, discusses what parts of the ACA might survive the repeal of most of the law.